Insufficient Experimentation Because Agents Herd

Kimiko Terai and Amihai Glazer
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Kimiko Terai: Faculty of Economics, Keio University

No 2014-008, Keio-IES Discussion Paper Series from Institute for Economics Studies, Keio University

Abstract: Consider a principal (say a central government) which allocates a fixed budget among multiple agents (say local governments). Each agent chooses a policy or technology. After observing the success or failure of each agent, the principal allocates a larger share of the budget to agents who succeeded than to those who failed. Under these conditions, a Nash equilibrium may have all agents herd, all choosing the same technology, even though the principal would prefer that they experiment, with different agents choosing different technologies. Relatedly, under some conditions all risk-averse agents may choose a technology whose outcome is risky, over a technology whose outcome is certain.

Keywords: Delegation; herd behavior; risk-aversion; fiscal decentralization; policy innovation resource allocation in organizations (search for similar items in EconPapers)
JEL-codes: D81 H61 H77 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-12
New Economics Papers: this item is included in nep-mic
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